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Archive for July, 2014

Joseph_Ruppe_03Joseph Ruppe, CPA

Senior Manager

WithumSmith+Brown

New York, NY

 

 

On July 8, 2014, The U.S. Department of Justice and the Internal Revenue Service (IRS) announced that a U.S. individual was sentenced to serve six months in prison and an additional six months and one day of home confinement for concealing more than $8 million in foreign bank accounts in India and Dubai.

According to the evidence presented in court, the U.S. taxpayer controlled several foreign bank accounts at HSBC in India and Dubai, including accounts held in the name of his wife and adult children. The taxpayer invested the funds in these accounts in certificates of deposit, which earned interest at rates as high as nine percent. The taxpayer funded these accounts by mailing checks from the United States and by transferring money from other undeclared bank accounts in Singapore and the United Kingdom to his family’s accounts in India.

In October 2013, a jury convicted the taxpayer of failing to report his family’s foreign bank accounts to the government on tax returns and Reports of Foreign Bank and Financial Accounts (FBAR). The jury also found that the taxpayer failed to report more than $1 million in interest income earned from these accounts between 2007 and 2009.

Prior to the sentencing hearing, the IRS assessed and demanded payment of a FBAR penalty against him for over $14 million.

U.S. persons must report their worldwide income on their taxes. In addition, they must file a FBAR annually if their offshore accounts total over $10,000 at any time.  If you have both failures, the IRS wants you to go into the Offshore Voluntary Disclosure Program. It involves reopening prior tax years, and paying taxes, interest and penalties, but no prosecution.

The IRS can assess a penalty on 50% of the highest balance in the account each year for willful failure to file the FBAR form. Therefore, the penalty can exceed the value in the account if the taxpayer does not file for several years.

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tom_gironeThomas Girone, CPA

Senior Manager

WithumSmith+Brown

Red Bank, NJ

 

 

Generally, United States citizens and resident aliens are taxed in the U.S. on their world-wide income. However, there are exceptions to this rule. A portion of your foreign earned income can be excluded from taxation in the U.S., and a deduction for foreign housing costs can offset that income if you have a tax home in a foreign country and are either: (i) a bona fide foreign resident, or (ii) physically present in the foreign country for 330 full days during any consecutive 12 month period. For 2014, the foreign earned income exclusion allows up to $99,200 of foreign earned income to be excluded from your taxable income.

When determining whether or not you may qualify as a bona fide foreign resident, you will have to consider certain factors. What was your intention or purpose for the trip? What was the nature and length or your stay? To qualify, you must show the IRS that you were a resident in a foreign country or countries for an uninterrupted period that includes an entire tax year. These determinations are made on a case-by-case basis.

The housing exclusion applies only to amounts that were paid by your employer, which includes any amounts that were paid to you and/or paid or incurred on your behalf by your employer that are taxable foreign earned income to you for the year. The housing deduction applies only to amounts paid for with self-employment earnings.

Your housing amount is the total of your housing expenses for the year minus the base housing amount. The computation of the base housing amount is tied to the maximum foreign earned income exclusion. The amount is 16% of the maximum exclusion amount (computed on a daily basis), multiplied by the number of days in your qualifying period that fall within your tax year. Housing expenses do not include expenses that are lavish or extravagant, the cost of buying property, purchased furniture or accessories and improvements and other expenses that increase the value or appreciably prolong the life of your property.

Also, for purposes of determining the foreign housing exclusion or deduction, your housing expenses eligible to be considered in calculating the housing cost amount may not exceed a certain limit and may vary depending upon the location. Additionally, foreign housing expenses may not exceed your total foreign earned income for the taxable year.  Your foreign housing deduction cannot be more than your foreign earned income less the total of your foreign earned income exclusion, plus your housing exclusion.

It is important to note that although the foreign housing exclusion and/or deduction will reduce your regular income tax, they will not reduce your self-employment tax.

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